On November 2, 2020, the Securities and Exchange Commission (the “SEC”) voted to amend its capital raising rules for Regulation Crowdfunding (“Regulation CF”) with the objective of promoting capital formation and expanding investment opportunities.

The three key changes to Regulation CF are: (i) increase in the offering limit from $1.07 million to $5 million; (ii) amendment of certain investment limits for investors; and (iii) extension of the time period providing an exemption from certain financial statement review requirements for issuers offering $250,000 or less of securities. The amendment (the “Amendment”) shall be effective 60 days after publication in the Federal Register (except for the amendment granting an extension of temporary relief from certain financial statement review requirements – which is effective now). We anticipate effectiveness in mid-January of 2021.

Increase in the Offering Limit in Regulation CF

Prior to the Amendment, eligible companies were permitted to raise a maximum aggregate amount of $1,070,000 through crowdfunding offerings in a 12-month period. The Amendment increases this limit to $5 million. This change has long been sought by proponents of crowdfunding, and it should provide early stage issuers with better access to greater amounts of capital.

Increase in the Investment Limits for Investors

Prior to the Amendment, individual investors have been limited in the amounts that they can invest in offerings under Regulation CF for a 12-month period. With this Amendment, there will be no investment limits on “accredited investors.” Additionally, non-accredited investors will now be able to use the greater of their annual income or net worth when calculating their investment limits.

Extension of Certain Temporary Relief Measures

In light of economic challenges faced by small businesses due to the COVID-19 pandemic, the SEC granted temporary relief to issuers from certain provisions of Regulation CF to issuers. One of the temporary relief measures provided was an exemption from certain financial statement review requirements for issuers that offered $250,000 or less in reliance on Regulation CF within a 12-month period.

The Amendment extends this exemption from compliance with the financial statement review requirements for an additional period of 18 months.

Conclusion

The Amendment is consistent with the SEC’s efforts to harmonize, simplify, and improve the exempt offering framework. In particular, the changes to Regulation CF should facilitate capital raising activity for early stage companies. 

Law clerk Sanjana Ramkumar contributed to this article.